A newly formed coalition of municipal utilities, consumers, independent producers and energy service companies is warning that a potential natural gas supply crunch and higher retail energy prices are in store for this year due largely to speculator-induced price volatility within the markets.

The Coalition for Energy Market Integrity and Transparency (EMIT) cited an April 23 study by the American Gas Association (AGA) as the basis for its concern. While the annual study found producer gas reserve additions overall exceeded production in 2001, boosting reserves to 180 Tcf nationwide, EMIT President Arthur Corbin said a closer examination of the study showed the top 30 producers that hold half of U.S. gas reserves did not add enough reserves last year to replace production, even though the average price they received for their gas was more than $4/Mcf.

Corbin, who is president and general manager of the Municipal Gas Authority of Georgia, blames the “rising influence of speculators” in the gas and electricity markets for this lower replacement rate for major producers. “Unwarranted price volatility, promoted by those in a position to exert market power, is destroying the nation’s natural gas production infrastructure, as evidenced by a decline in the number of rigs drilling for gas from a peak of 1,068 in July 2001 to 591 in April 2002. This huge decline in new gas wells comes at a time when natural gas prices are 50% to 60% above historical levels,” he said.

“This lack of supply response at these higher prices clearly shows that producers have no confidence in the natural gas market. This lack of confidence is directly related to the issue of unwarranted price volatility” brought on by speculators, according to Corbin. “When speculators — and not producers — receive the benefit of higher wholesale and retail prices, those higher prices do not act as a stimulant to production.”

Corbin predicts that reserve replacement “will likely be much worse” in 2002. “Volatile, unpredictable gas prices have caused U.S. gas producers to slash their budgets, and the drilling rig count this year is averaging 656 versus 939 in 2001.”

Matthew R. Simmons, president of Houston-based Simmons & Co. International, cautioned that the AGA report “could create a very false sense that things are well in natural gas, just as the country’s daily supply is poised to drop by what could be a genuinely tragic surprise.”

In 2000 and 2001, the exploration and production industry embarked on the “greatest drilling boom” for gas supplies in U.S. history, shattering the prior record of gas wells completed in 1981 by more than 1,000 wells, yet daily gas supply stayed flat, noted Simmons. That “boom peaked at the end of last summer. Drilling for gas has now dropped 45%, which is just starting to be felt in daily production. By the time the country experiences the full impact of this drilling collapse, daily supplies could drop by 10% or higher.”

Chris McGill, who headed up AGA’s gas reserves study, noted that the top 30 producers replaced about 97% of the gas reserves that they produced last year, but he didn’t see this as a reason for concern. “They don’t always replace 100% or more” of their reserves, he told NGI. Overall, the study showed that the production industry had “very strong replacement” in 2001.

While he agrees that production capability has slipped somewhat, McGill said that, unlike Corbin or others, he was not in the “alarmist camp right now.”

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